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The Unsold Home: Why Property Developers Struggle to Sell The House?

Real Estate Investment and Asset Management
Dec 7, 2017 10:43 AM 4 min read
Editorial

India’s real estate sector has slowly started recovering from the after-effects of demonetisation and implementation of RERA or the Real Estate (Regulation and Development) Act. The erstwhile unregulated industry, often termed as a “magnet” for black money owing to a lack of standardization and inherent opacity is finally seeing a silver lining. RERA will hopefully bring much-needed transparency by making developers more accountable for their projects. The market is expected to consolidate and mature over the next few years and benefit in 2 major ways – firstly an improved supply-demand dynamic for the end-users and second by ensuring only serious players operate.

 

The Revenue Department last week suggested a bizarre tax levy to penalize Developers holding unsold housing inventories.  This implies that if a developer holds a property for more than a year, that would translate into a tax penalty on the hypothetical rental income given up. Hoarding of properties by developers waiting for capital appreciation should definitely be discouraged – but does such a measure really serve the end-user or simply acts as another headwind for the sector?

 

With a rising middle class and upward economic growth, the fundamentals of Indian real estate market are stronger than ever. However, there is no question that India has an acute housing shortage which needs to be addressed immediately. Data from Cushman and Wakefield suggests that total demand in NCR alone for the next 5 years would be close to 2 lakh units per year, whereas the supply stands at a meagre 25% of the demand at 51,000 units per year. This trend resonates across other metropolitan cities.

 

Source: Cushman & Wakefield

 

Why is there an unsold housing inventory problem? The current unsold inventory for 3 biggest metropolitan areas stands at an alarming 4.8 lakh units. Although this is 8% less than 2016, this reduction does not imply that units are being sold faster, but on the contrary both units sold and new unit launches post demonetisation have steadily declined.

 

As a result of recent reforms, the industry already saw a dip of 50% in new launches for 7 key cities (NCR, Mumbai, Bengaluru, Chennai, Kolkata, Pune, Hyderabad) from 40,000 units per quarter in 2016 to 20,000 in 2017. Taxing vacant inventories would further force developers to hold off new launches till they get rid of their existing units, only aggravating the housing shortage.

 

Source: Anarock Property Consultants

 

Instead of additional taxation, we first need to assess what exactly led to this unsold inventory in spite of the booming demand. Besides the usual suspects such as execution delays, developer's insolvency, and legal disputes, there are 2 other reasons that come to play – developers have been mostly targeting Medium Income Group (MIG) customers for their end product yet majority of demand lies in the less lucrative affordable housing segment.

 

Affordable housing constitutes 48% of the total housing demand, yet constitutes a miniscule 2% of the total housing supply. Clearly, this is a problem that needs to be immediately addressed and the Government with its initiatives in this field (tax breaks, easier access to capital) has taken right steps, yet much more needs to be done.

 

Source: Cushman & Wakefield

 

The second reason is the location of these unsold inventories. A key determinant for any booming real estate market is the availability of local employment opportunities and that is where developers often go wrong. For instance in NCR, the highest vacancies are in Greater Noida where there is excess residential stock but limited skilled employment opportunities. People desire to live close to their work and instead of making chunks of residential units where there are few employment opportunities, our cities need more mixed-use developments with integrated offices, retail and residential complexes.

 

Projects such as Magarpatta City in Pune form a good case study, where a thriving township with offices, shopping centers, parks and residences has become one of the most desirable places to live in Pune. Government also needs to make sure that businesses get drawn to these areas by providing them incentives to move along the suburbs.

 

With the industry moving in the right direction, the Government should ensure fair play for the developers and incentivize them to build more units instead of introducing additional penalties. Taxing unsold inventory would surely not solve the housing problem. It might have some short-term benefits but in the long run would only deepen the growing housing crisis. An over-regulated industry does more harm than good.